00:00:00
In the wake of Trumps liberation day tariff
announcement, we saw U.S. stocks, bonds and the
00:00:05
dollar all fall at once in what many interpreted
as a broad shift away from investing in America.
00:00:12
When the stock market falls and volatility
explodes like it did last week, you’d expect
00:00:18
Treasury yields to fall as investors rush to
safety and buy treasury bonds. That didn’t happen
00:00:24
this time around – investors were instead selling
treasuries - and their yields were spiking higher.
00:00:31
When you see Treasury yields rise like this,
you would normally expect the dollar to rise,
00:00:36
as the higher interest rates should attract
investors. That didn’t happen, either.
00:00:42
As Robert Armstrong described it in the FT
“the US policymakers had been unpredictable
00:00:48
and incompetent at a moment where high
deficits and lingering inflation worries
00:00:53
mean that there is no room for amateurism.”
As the Economist said - if investors are fleeing
00:01:00
even though bond returns are up, it must be
because they think America has become more risky.
00:01:06
They went on to say that rumors are rife that big
foreign asset managers are dumping greenbacks.
00:01:12
These wild swings in the bond market and the fall
in the dollar by most accounts caused Trump to
00:01:18
announce a 90 day pause on tariffs. [Clip]
“Well, I thought that people were jumping a
00:01:24
little bit out of line. They were getting yippy,
you know, they were getting a little bit yippy,
00:01:28
a little bit afraid, unlike these champions.”
During the market chaos we saw other safe haven
00:01:35
markets rise as money moved into German, Japanese
and Swiss government bonds – along with gold.
00:01:42
The head of foreign exchange research
at Deutsche Bank wrote in a note that
00:01:47
“The market is reassessing the structural
attractiveness of the dollar as the world’s
00:01:52
global reserve currency and is undergoing
a process of rapid de-dollarization.”
00:01:58
Many compared the selloff in US assets to the
British market turmoil in 2022 when Liz Truss
00:02:05
announced sweeping tax cuts that she said she
would pay for with massive government borrowing.
00:02:11
Larry Summers - the former U.S. Treasury secretary
wrote on twitter that the broader sell-off
00:02:17
suggested a “generalized aversion to US assets in
global financial markets” and he went on to say
00:02:24
that “We are being treated by global financial
markets like a problematic emerging market.”
00:02:30
Ray Dalio, the hedge fund manager who has been
warning for the last three years that the US could
00:02:36
lose its reserve currency status said that we are
seeing a classic breakdown of the major monetary,
00:02:43
political, and geopolitical orders. He said
that “when you reach the part of the cycle
00:02:48
that you have to borrow money to pay debt
service, and the holders of those bonds say
00:02:54
it’s a risky situation — in the private debt
market, we call that the debt death spiral,’
00:03:01
In one of his YouTube videos from three years ago
Dalio describes how he has studied the ten most
00:03:07
powerful empires over the last five hundred years
– along with the last three reserve currencies –
00:03:13
and how global leadership changes. He says in the
video that he has found that there are 250-year
00:03:20
economic cycles where empires rise and fall. He
argued back then that we are living through a
00:03:27
change in world leadership today and the question
isn't if we're in the middle of a changing world
00:03:32
order, it’s how deep in we are and what can we
do to prevent this change before it's too late.
00:03:39
The most worrying market event of the last
few weeks was the spike in US Treasury yields,
00:03:45
and the correlation that was seen between
stocks, bonds and market volatility.
00:03:50
While markets have since calmed down, investors
are still concerned that foreign buyers are
00:03:56
stepping away from US Treasuries and now wonder if
it is wise to apply a risk premium to US assets.
00:04:04
Some have even suggested that China might have
been dumping U.S. Treasuries last week to put
00:04:09
Trump under pressure to walk back his tariffs.
So is Ray Dalio right – should we be concerned
00:04:16
about the US dollar losing its reserve currency
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Ray Dalio told CNBC last week that he
is concerned about trade disruptions,
00:05:46
mounting U.S. debt, and emerging world
powers bringing down the international
00:05:51
economic and geopolitical structure that has been
in place since the end of World War II. He said
00:05:57
that while Trump’s tariffs have understandable
goals - they are being implemented in a “very
00:06:03
disruptive” way that creates global conflict.
He called for a trade agreement with China,
00:06:09
said that Congress should reduce
the federal deficit to 3% of GDP
00:06:14
saying that “the very value of money is at stake.”
While I agree with Dalio that the trade chaos that
00:06:21
we have seen in recent weeks is bad for the United
States and I worry that other unconventional ideas
00:06:27
that some of Trumps economic advisors have been
discussing - like Stephen Miran’s Mar-a-Lago
00:06:33
accord - are extremely worrying – I don’t agree
that the dollar will loose reserve currency
00:06:39
status any time soon – simply because there is no
reasonable alternative to the Dollar right now.
00:06:45
If you are interested – I’ll discuss Miran’s
Mar-a-Lago accord towards the end of the video.
00:06:51
The US Dollar first took on reserve currency
status in 1944 - as World War II was drawing
00:06:58
to a close. That year, representatives from
44 nations met at a hotel in Bretton Woods,
00:07:03
New Hampshire to hammer out a new
financial system for the global economy.
00:07:09
Out of Bretton Woods came the World Bank, the
IMF and most importantly, a new role for the
00:07:15
dollar as the "international reserve currency."
At the time, Europe was in rubble – the formerly
00:07:22
world leading economies were destroyed and the
United States controlled most of the world's gold.
00:07:29
The US agreed to fix the value of the dollar to
gold at $35 an ounce and other countries then
00:07:36
fixed their exchange rates to the dollar, making
the dollar the central cog in the overall system.
00:07:42
In 1971, Richard Nixon suspended the
convertibility of the dollar into
00:07:48
gold - and the fixed exchange rate system
became a floating exchange rate system,
00:07:53
but the dollar still remained at the center
of it as the international reserve currency.
00:07:58
The dollars special role has long irritated
politicians from other countries and the
00:08:04
French Finance Minister in 1960 famously
complained about America’s "exorbitant
00:08:09
privilege" as the US could print paper
to buy physical goods from its trade
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partners. Other countries he argued
had to create goods to earn currency.
00:08:19
In 2022 when Russia invaded Ukraine - the United
States was able to sanction Russia – freeze their
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dollar reserves and cut them off from the
global financial system. A number of world
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leaders expressed concern at the time that
the United States could weaponize the dollar
00:08:36
and access to the global financial system. At
the time – this wasn’t a huge concern for most
00:08:42
countries – as they didn’t envision a world in
which they were at odds with the United States.
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Most international leaders felt that
if you weren’t planning on a war of
00:08:52
aggression – there was no reason to worry
about the weaponization of the dollar. That’s
00:08:57
how the thinking went at the time.
US government debt has long been the
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preferred place for central banks around the
world to store their reserves because of the
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size and strength of the country, the safety
and tradability of its debt and the dominant
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role of the dollar in international trade
and finance, and (of course) the rule of law.
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As the FT pointed out this week to highlight the
global importance of the dollar - while the US
00:09:25
only accounts for about a quarter of the global
economy, more than 57 per cent of the world’s
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foreign exchange reserves are held in dollars.
About 60 per cent of all international loans
00:09:37
and deposits are denominated in dollars, and 70
per cent of international bond issuance is too.
00:09:44
In foreign exchange, 88 per cent of all
transactions cross reference the dollar – as
00:09:50
while there may not be a liquid market between
two small currencies – there will be a liquid
00:09:55
market between each of them and the US dollar.
The FT points out - that even physical US bank
00:10:03
notes are widely held abroad - where about half of
all US bank notes in issue are held by foreigners.
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The Euro is the principal alternative-
and it makes up 20 per cent of central
00:10:15
bank reserves. After that comes the
Japanese Yen and the British pound.
00:10:20
In the past – foreign owned - US Treasury
bonds were seen – in the US - as a source
00:10:26
of geopolitical leverage. Hillary Clinton –
the then secretary of state famously asked in
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2009 – when talking about China - “How
do you deal toughly with your banker?”
00:10:38
This way of thinking has changed significantly
in recent years – where owners of US assets now
00:10:45
instead worry about upsetting the country that
holds so much of their central bank reserves.
00:10:51
So why do foreign countries own so many dollars?
Well, as the economist Michael Pettis frequently
00:10:57
points out - If a foreign country runs
a current account surplus - exporting
00:11:02
more than they import - they accumulate the
currency (and thus the bonds) of the country
00:11:07
with the largest current account deficit.
The deficit country which is importing more
00:11:13
than it exports – has to borrow money to do
this – and it borrows money by issuing bonds.
00:11:20
Their bonds are going to be the most available to
invest in – and thus that’s where the money goes.
00:11:27
Central banks keep their reserves in US dollars,
Euros, Yen and pounds, for one very simple reason.
00:11:34
Only those economies and financial systems are
large enough, open enough, flexible enough and
00:11:41
trustworthy enough to accommodate large trade
deficits. But… the badge of honor associated with
00:11:48
being a reserve currency does come at the cost
of a nation’s ability to manage its debt levels.
00:11:54
If other countries are going to buy your
currency – you can either let your currency
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rise in value – or issue additional
bonds to stabilize the exchange rate.
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China – which is a huge economy - couldn’t replace
the dollar in the global financial system with its
00:12:11
currency - without opening its capital account and
allowing the free movement of currency in and out
00:12:17
of its economy – which it is unwilling to do.
Countries like China that run a trade surplus
00:12:24
could in theory invest their reserves in other
large global economies like Europe and Japan,
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but - these economies also run persistent
surpluses and instead of issuing a lot of
00:12:36
bonds - are net acquirers of foreign assets too.
If China, were to move from US dollar reserves
00:12:43
to Euro reserves, the ECB would either have to
tolerate an appreciation in the value of the
00:12:49
Euro or it would have to buy other foreign
assets – which means American assets - to
00:12:55
neutralize the net impact of the Chinese inflows.
[Warren Buffett - Clip] you can't get rid if
00:13:00
you're the rest of the world you can't get rid of
dollars I mean if you're sitting in Japan China or
00:13:05
someplace and you own a lot of US government bonds
if you sell them to somebody in the United States
00:13:10
you get US dollars so you still have US assets
if you sell them to somebody in France you've
00:13:15
now got euros but they've got the the government
you can't you can't get rid of those assets but
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you can't have people trying to head for the door
very quickly with them under certain circumstances
00:13:24
Daniel McDowell from Syracuse University has
pointed out that in the past - central banks
00:13:30
only aimed to hold enough foreign exchange
reserves to cover about 3-months of their
00:13:36
country's imports or all of their short-term
debts. Reserves, from this perspective were seen
00:13:42
as a rainy-day fund to make sure an economy can
still trade and avoid default in time of crisis.
00:13:49
Other than that – foreign exchange was earned
so that foreign made goods could be purchased.
00:13:54
Over the last twenty years or so, central banks
around the world have been growing their reserves
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well beyond this point, and once reserves
get larger (as has been happening), Central
00:14:06
bankers begin think of them - as a portfolio
- where they want safe liquid investments,
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and they try to hold a diverse portfolio that
optimizes and stabilizes returns over time.
00:14:18
Brad Setser of the Council on Foreign Relations
points out that as China’s reserves grew,
00:14:25
they began to first shift their dollar portfolio
from US Treasuries toward Agencies, and then
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equities -- basically taking a bit more risk in
what is effectively an "investment portfolio.”
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Setser’s research shows that China began reducing
the dollar share of foreign reserves starting in
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around 2005 and that their diversification out of
the dollar was more or less complete by 2011 or
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2012. The Belt and Road initiative – he points
out – was a way for China to diversify their
00:14:57
reserves into physical assets around the world.
The big idea here - is that reserve currencies
00:15:04
don’t quickly come and go – it instead takes
decades for a country to gain or lose reserve
00:15:10
currency status – not weeks or months. The United
States became the leading economic power in the
00:15:17
world in the 1870’s but didn’t have the reserve
currency until around seventy years later – and
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this only happened when other major economies
were destroyed by war. London’s role as a major
00:15:30
financial center remains eighty years after the
pound lost its reserve currency status – as London
00:15:38
continued to be a center of financial expertise.
There has been some press over the last
00:15:44
week – pointing to Chinas stockpile of Treasuries
as a lever they could use to pressure Trump – with
00:15:51
some people wondering if Chinese selling
caused the bond market chaos that we saw
00:15:56
last week – which caused Trump to blink.
China is the number two holder of Treasury
00:16:02
bonds – coming in right after Japan – and they
own 759 billion dollars’ worth of US debt.
00:16:09
We can’t quickly work out who was selling bonds
last week or why – as there is no real-time data
00:16:16
available, but if China decided to do that
– they would be harming the value of their
00:16:22
investments in order to hurt the United
States which may not make a lot of sense.
00:16:28
Chinese treasury holdings have been
steadily falling to the lowest level
00:16:32
since 2011 according to the US Department of the
Treasury – but it’s not easy to know their exact
00:16:39
holdings. Brad Setser points out that some
of China’s foreign asset holdings show up
00:16:45
in the Chinese state-owned banks. Additionally,
holdings listed as belonging to countries like
00:16:50
Belgium are seen as being linked to custodian
accounts in China and these have been growing.
00:16:57
It is quite possible that China – and other
international investors might not be actively
00:17:03
selling US assets – but they may be nervous
about buying any more – and a big buyer who
00:17:09
walks away will also have an impact on markets.
The lower demand will show up in the pricing too.
00:17:17
US outperformance in recent years
has been a bet on US exceptionalism.
00:17:22
Investors bet on Americas cutting-edge
industries, its unrivaled universities,
00:17:28
the rule of law and a pro-business culture.
Janan Ganesh wrote back in January that unlike
00:17:35
other countries - the United States never had a
specific growth strategy – but whenever growth
00:17:41
bumped up against another imperative the
American bias was to choose growth. Ganesh
00:17:47
points out that other countries will claim that
growth is a priority – but then add an additional
00:17:53
priority – which is the one they really care
about. The US was different he said as whenever
00:18:00
growth came into conflict with another priority
– for Americans – growth always prevailed.
00:18:06
Robin Wigglesworth wrote this week
that - whether by accident or design,
00:18:11
almost every action taken by the US government
over the last three months has hurt the dollar.
00:18:17
The dollar index — which measures the strength
of the dollar against a basket of its biggest
00:18:22
peers — fell 2.8 per cent last week alone and is
down almost 9% since its peak in early January.
00:18:30
The dollar smile theory is an idea first
observed about twenty years ago by Stephen
00:18:36
Jen and it refers to the way that the US dollar
typically underperforms other currencies when
00:18:42
global growth is moderate but outperforms
when either the US is booming or during
00:18:48
times of market stress. In panicked markets –
according to the theory - people want to be in
00:18:54
dollars for safety – regardless of the state
of the US economy. This was clear during the
00:19:01
global financial crisis – when the dollar
rose and again during the COVID panic in
00:19:06
2020 as investors rushed to the dollar for safety.
Reuters point out that so far in 2025 - the dollar
00:19:15
has failed to respond positively to market stress,
suggesting that a profound shift in investor
00:19:22
behavior may be afoot. The worry now - is that
the Trump administration’s apparent willingness
00:19:28
to upend norms means that previously unthinkable
things are now possible. In such a scenario – the
00:19:36
dollar can no longer be viewed as a safe haven.
Katie Martin wrote in the FT this week that US
00:19:43
stocks carry political risk for the first
time. Its bonds no longer act like they are
00:19:49
truly risk-free. The dollar is not acting
like a magnet during periods of stress,
00:19:54
nor like a currency anticipating an
upswing in American economic growth.
00:19:59
Last June, before taking on his current role
at the treasury – Scott Bessent criticized
00:20:05
his predecessor Janet Yellen, for issuing
a lot of short-term treasuries and reducing
00:20:11
the supply of longer-term treasuries – he
described this as stealth quantitative easing
00:20:17
saying that it was being used to stimulate
markets in the lead up to the election.
00:20:23
Bessent claimed that he would reverse this -
but has instead doubled down - doing it on a
00:20:29
larger scale than before. Under Janet Yellen – the
maturity profile of treasuries was still within
00:20:35
the normal range. Bessent now says that he will
keep the dollar quantity of long-term treasuries
00:20:42
steady – which sounds fine - but because the
budget deficit is growing - this means he is
00:20:48
issuing proportionally fewer long-term bonds.
What Bessent is doing is essentially a bet
00:20:55
that long-term interest rates will fall. If he
expected them to rise – he would want to lock in
00:21:00
today’s low rates right now by issuing long term
bonds. Instead, he is borrowing short term – which
00:21:07
means that he constantly has to refinance
– and if rates go up he will be refinancing
00:21:14
at higher and higher interest rates.
The rapid U-turns in US trade policy
00:21:19
are destroying both consumer and business
confidence to the extent that analysts are
00:21:24
now slashing their growth estimates and worry
that the trade chaos will trigger a recession.
00:21:30
If the new trade policies cause inflation
and reduce growth – which is reasonable to
00:21:36
expect – the Federal Reserve will find itself
in a very tricky position. The Fed is already
00:21:42
expecting something like stagflation from the
current economic policies. If that happens,
00:21:48
Powell – or whoever replaces him at the Fed
- will have to choose between the Federal
00:21:53
Reserve’s employment and price stability mandates.
The US government already runs a budget deficit
00:22:00
of 7% of GDP which is quite high for a healthy
economy. In its quest to renew and extend the
00:22:08
tax cuts from Trump’s first term, Congress has
agreed to borrow even more. The amount the US
00:22:15
spends on interest on its debt has exploded over
the last five years, meaning that higher bond
00:22:21
yields would cause big problems. The yield on long
term bonds essentially tells the administration
00:22:29
whether they can spend or not. Earlier this month
the House of Representatives approved the Senate’s
00:22:35
plan for a budget that could add $5.8 trillion
dollars to deficits over the next ten years,
00:22:41
according to the nonpartisan Committee for a
Responsible Federal Budget. That is more – they
00:22:47
point out - than Trump’s first-term tax cuts,
the response to the covid-19 pandemic and Biden’s
00:22:54
stimulus and infrastructure bills combined.
The US is already spending half of its budget
00:23:01
on interest rate expenses alone, Elon Musk’s
DOGE has failed to make any significant cuts
00:23:08
to government spending despite causing huge
disruption. A tax cut combined with lower
00:23:14
growth could spook the bond market - as in such
a scenario you would see debt growing faster
00:23:20
than GDP – with no special event to explain
it like the global financial crisis or Covid.
00:23:27
In such a scenario investors could stop buying
government bonds and interest rates would rise.
00:23:34
Much like with Liz Truss’s mini budget
disaster a few years ago, the bond market
00:23:39
might not behave for the US administration -
making America’s fiscal profligacy much more
00:23:46
difficult to maintain. If interest rates were
to rise rapidly as investors backed away from
00:23:51
buying US Treasuries – Bessent’s decision to
lean more on short term treasuries to fund the
00:23:58
government could turn out to be a huge mistake.
We are already seeing real world problems
00:24:04
associated with Trump’s tariffs. The Dallas
Fed’s energy survey showed a small increase
00:24:10
in activity in the oil and gas sector for the
first quarter of 2025 – but with oil prices
00:24:16
down and the and the cost of drilling up – this
doesn’t work for the oil and gas sector. Tariffs
00:24:22
on steel have pushed up the cost of new wells by
10 or 20 percent, according to some estimates.
00:24:29
We have already seen a collapse in ocean container
bookings since the tariff announcements. The lack
00:24:35
of containers arriving at US ports is hitting
the trucking industry too – not unlike the way
00:24:41
it hit British truckers in the wake of Brexit.
Mack Trucks announced this Thursday that they
00:24:48
plan to lay off as much as ten percent of
their workforce in Allentown Pennsylvania
00:24:53
over the next three months. Their spokesperson
told the press that “Heavy-duty truck orders
00:24:59
continue to be negatively affected by market
uncertainty about freight rates, demand, possible
00:25:06
regulatory changes, and the impact of tariffs.”
Most of the big Trump Trades that investors placed
00:25:14
when the election results were announced are
now failing and being unwound. Investors had
00:25:20
bet on a strong dollar and a weak euro –
they had bet on cryptocurrencies – pushing
00:25:25
the price of bitcoin above $100 thousand dollars
after the election results were announced. They
00:25:30
expected emerging markets to underperform
and big American tech firms to outperform.
00:25:36
None of this has worked out as planned.
A lot of people have been asking if China holds
00:25:43
any cards in fighting back against Trump’s tariffs
– and of course they do – that’s where cards are
00:25:49
made after all. The United States is in a stronger
bargaining position than China is – as the US is
00:25:56
the biggest market for Chinas manufactured goods.
One problem though is that the United States
00:26:03
can’t actually source many of the goods it buys
from China internally – or from anywhere else.
00:26:09
China – on the other hand - can replace its
imports from the US more easily – as China mostly
00:26:16
buys agricultural produce from the United States -
so a big winner from this trade war will be Brazil
00:26:22
who were a big winner in 2019 too - when the
first round of tariffs was announced. Brazilian
00:26:28
farmers – according to Reuters - are already
seeing additional Chinese demand for soybeans.
00:26:35
There has been a lot of press about how the US is
reliant on China for rare earth metals which we
00:26:41
are always told are crucial for building missiles
fighter jets and other high-tech products. While
00:26:47
that is true – Javier Blas at Bloomberg points
out that the United States only imports around
00:26:54
170 million dollars a year worth of rare earth
metals – and the majority of them are used in
00:27:00
things like the motors in power tools and
vacuum cleaners. Many of the companies who
00:27:05
need these metals have already stockpiled
them and even if the United States had to
00:27:10
pay up for them – it wouldn’t be a major expense.
So, Will China blink first in this trade war? -
00:27:18
well, that is hard to answer – as it is not really
clear what China could even offer Trump in order
00:27:25
to satisfy him. Trump – for all we know - may have
no desire to negotiate anything with China and
00:27:32
may just want the tax revenues associated with the
tariffs. It is possible that he believes this will
00:27:39
bring in enough revenue to balance his budget.
There are rumors that President Xi has no plans
00:27:46
to meet up with Trump in person to negotiate at
all – as after seeing the spectacle of Ukraine’s
00:27:52
Zelenskyy being publicly humiliated in front
of the world press and being given fashion
00:27:58
advice by Marjorie Taylor Greene’s boyfriend
– political analysts are saying that there is
00:28:03
no way that he would agree to any American led
publicity stunts designed to humiliate China.
00:28:10
There hasn’t been much press about Biden’s
Inflation Reduction Act of 2022 which authorized
00:28:17
$800 billion dollars in renewable energy
and climate change spending – which is now
00:28:22
projected to cost more than $1 trillion
over the next 10 years and possibly
00:28:27
between two and four trillion dollars by 2050.
People argue that Trump won’t repeal the act
00:28:35
because so many jobs in renewables are expected to
be created in Republican-led states like Oklahoma,
00:28:42
Arkansas, and Mississippi. However, this week
the Trump Administration issued an order for the
00:28:49
leading global energy company Equinor, to stop
construction on its Northeastern US Offshore
00:28:55
Wind project. This project involved hundreds of
millions of dollars of payments by Equinor to the
00:29:02
US federal government for the Bureau of Ocean
and Energy Management – ocean/land license,
00:29:09
and Equinor had reached financial close
on the project, and had drawn down over
00:29:14
$1.5 billion of its project loans to finance
construction works to date. Bankers describe
00:29:21
the stop-construction order midway through
this project - as having a “chilling effect”
00:29:26
for international investors – given the rarity of
administrations retroactively cancelling permitted
00:29:33
and approved, and in-construction projects.
The stop-work order on a multi-billion-dollar
00:29:40
international investment project like this implies
that the Trump Administration is quite likely to
00:29:46
repeal all of the IRA tax subsidies for renewable
projects. Cancelling these projects will save far
00:29:54
more money than DOGE could, and Trump’s base is
not on side for green transition projects. The
00:30:00
investment case for projects like these only works
with large government-provided cash tax subsidies.
00:30:09
There are many ways this could work - Trump
could keep the subsidies in place and disallow
00:30:15
any usage or distribution of them. A complete
repeal might be politically difficult, but
00:30:21
Trump appears to have complete control over all
branches of government – so who knows. He could
00:30:27
even keep the subsidies in place and allow their
use only for nuclear and fossil fuel projects.
00:30:34
Predicting Trumps economic policies has
been impossible so far – as they appear
00:30:39
to change on a day-by-day basis – but this
seems like something he would love to cut.
00:30:45
There has been a certain amount of talk recently
about how the Trump Administration could radically
00:30:51
restructure and refinance US debt under what
is being called “The Mar-a-Lago Accord.”
00:30:57
This phrase was first coined by Zoltan Poszar,
the former Credit Suisse Strategist last year.
00:31:03
He put forth that the US could force countries
to accept a weaker dollar and lower interest
00:31:09
rates on their US Treasury investments in
exchange for protection under the US security
00:31:16
umbrella. The idea has been described
as a “protection racket” by Martin Wolf.
00:31:22
The name - is a take on the “Plaza Accord” – a
1985 deal where France, Japan, West Germany and
00:31:30
the UK agreed to work with the US to jointly
weaken the dollar against their currencies.
00:31:37
Pozar’s idea was elaborated on by Stephen Miran
- The chairman of Trump’s Council of Economic
00:31:44
Advisors in a paper which provides a sort of
intellectual framework for a lot of what Trump
00:31:50
is currently doing with his trade policies.
The idea being discussed - would be to force
00:31:55
investors to accept an extension on the
maturity of their treasury holdings at
00:32:01
a below market interest rate – this is
obviously something no investor would want
00:32:06
to accept – and most would consider a default.
There was a very interesting discussion on this
00:32:12
topic on the Odd Lot’s podcast this Thursday. But
the fact that people are seriously discussing a
00:32:18
default by the US Government on its bond
obligations is extremely disturbing – and
00:32:24
tells you a lot about why investors might be
worried about investing in Trumps America.
00:32:30
To be very clear – Trump himself has never
mentioned a Mar-a-Lago Accord – or discussed
00:32:36
anything remotely similar to this idea – instead
he has focused entirely on tariffs. I don’t
00:32:42
believe that such a deal is even remotely likely
– and I think that even attempting to implement a
00:32:48
policy like this would be so destructive and
chaotic for the U.S. economy and financial
00:32:53
markets that it could never happen. As Martin
Wolf asked in the FT – why would any investor
00:33:00
believe that Trump is capable of sticking to
any deal he has reached. He has, after all,
00:33:06
abandoned Ukraine, put the commitment to Nato
into doubt and mounted an assault on Canada.
00:33:13
I am not as negative on investing in the United
States as many of the people I have quoted in
00:33:18
this video – mostly because I believe that
there are sufficient checks and balances in
00:33:24
the American form of Government to prevent
any of the worst-case-scenarios that people
00:33:29
have been worrying about from actually happening.
While the US has lost some credibility – as market
00:33:36
moving policies are announced and withdrawn
in quick succession – all at a time where
00:33:41
high deficits and lingering inflation worries
mean that there is little room for mistakes.
00:33:47
So far, the market moves have not been too extreme
– the US economy is still strong – and Trump does
00:33:54
appear to respond to market chaos by backing
down – which is a good sign for investors.
00:34:00
The problems we have been talking about are
all just policy mistakes which fortunately
00:34:06
can be reversed they are not structural and
they are very different to the situations
00:34:11
faced by the economy during the global
financial crisis or during the pandemic.
00:34:17
I do worry that a lot of retail investors
have been conditioned to always buy the
00:34:22
first market downtick - in the belief that
not only do stonks always go up – but that
00:34:28
they recover from problems at great speed.
Markets haven’t yet priced in three years
00:34:34
and three quarters more of chaos – and investors
aren't really pricing in the damage that could
00:34:40
be done to great American companies like Apple -
if the president continues on his current path.
00:34:46
The United States is a country rich in
resources with an educated work force - and
00:34:52
an entrepreneurial spirit that should not be
bet against. I think that it is a mistake to
00:34:58
want manufacturing jobs back from China.
While trade is out of balance – the goal
00:35:04
should be to sell the goods that America
is best at making internationally – not to
00:35:09
take one of the most productive workforces in
the world and give them the jobs done by the
00:35:15
99th most productive workforces in the world.
In an agrarian economy - it would be extremely
00:35:22
difficult for one farmer – with no access to
machinery - to be a whole lot more productive
00:35:27
than his neighbor. With the high-tech businesses
that America has focused on - it is possible for
00:35:33
one worker to produce digital goods and services
that can be sold all over the world generating
00:35:39
much higher productivity - which is far beyond
what can be done hand assembling mobile phones
00:35:45
and toasters. It would be a huge mistake for
America to destroy this type of business in order
00:35:52
to bring back a type of work that is low margin,
badly paid and often dangerous - especially when
00:35:59
there is no jobs shortage in America and we
have an ageing population who are more likely
00:36:05
to be spending on services like healthcare in
the coming years than on manufactured goods.
00:36:11
At the margin investors may be less excited about
owning US assets than they were in the past – and
00:36:17
for good reason. It is worth remembering though
- that the country still hosts many of the best
00:36:23
run and most profitable businesses that
have ever existed in human history – in
00:36:29
the long run its workforce, its financial
system and its infrastructure are so good
00:36:34
that it can overcome any setbacks.
If middle-class and working-class
00:36:39
Americans have a problem – it’s that home
prices have gone up faster than wages have
00:36:44
– I don’t see how reducing the purchasing
power of the dollar or taxing imported goods
00:36:50
will do anything to improve that situation.
If you found todays video interesting - you
00:36:56
should watch my video on the frozen real estate
market next. Don’t forget to check out our sponsor
00:37:02
CovePure using the link in the description
below. Talk to you in the next video, bye.
